Didn't Quite Make the Grade? Understanding Your Bad Credit Mortgage Options

By Gina Pogol
Mortgage Credit Problems Columnist

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Lenders used to divide customers into two classes--good and bad. The good guys got low rates and friendly terms. The bad guys got high fees and ugly rates. Today, however, borrowers with a just a few credit dings can find better terms for their bad credit mortgage or debt consolidation loan. Understanding risk-based mortgage pricing can save you money.

What is a Bad Credit Mortgage?

Bad credit mortgages, or subprime loans, were created for borrowers with varying problems, such as a bad credit score, insufficient credit or employment history, nontraditional credit, unverifiable income, or inadequate savings. Lumping them all into the same category forced some borrowers to pay higher rates than they deserved.

How Do Bad Credit Mortgages Differ from Conventional Ones?

First, understand your grade. It can be anywhere from A-, for someone with a limited but not bad credit history, to B and C borrowers, who may have recent late payments or other skeletons in their financial closets. D, the lowest grade borrowers, may have dozens of collection agencies after them, cars being repossessed, and homes in foreclosure. The D grade borrower pays significantly more than the A- borrower.

Start With Fannie or Freddie

FNMA (Fannie Mae) and FHLMC (Freddie Mac) are government-sponsored enterprises that buy mortgages from banks and resell them to investors. Because they buy and sell the majority of conventional mortgages, their guidelines hugely influence American mortgage markets.

Recently, Fannie and Freddie entered the subprime market, creating expanded guidelines for bad credit borrowers who just missed being good borrowers. Applying for a loan with a FNMA or FHLMC lender gives you a shot at these loans. The rates are better than traditional bad credit mortgages, and some programs even lower your rate when you make your payments on time.

Help Yourself

If you suspect that you are close to being a Grade A borrower, you owe it to yourself to apply with a FNMA or FHLMC lender before going anywhere else for your bad credit mortgage or debt consolidation loan.

"Expanded Approval," FNMA

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